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Wedbush: Electronic Arts To Meet Or Beat Q3 Expectations
by Jason Dobson
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January 3, 2007
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Market analyst firm Wedbush Morgan Securities has predicted that major game publisher Electronic Arts will meet or “modestly beat” expectations with its third quarter earnings, due primarily to game sales for the quarter, as well as the completed acquisition of Jamdat Mobile in early 2006.
Because of this, the firm has maintained its rating of EA stock as being a "strong buy" ahead of EA's earnings announcement expected on around February 1, with a 12-month price target of $65, compared to a current stock price of $50.66.
In a research note to investors, Wedbush Morgan's Michael Pachter noted that while shares of Electronic Arts have declined nearly 15 percent over the last six weeks, much of this has been due to apparent uncertainty on the part of investors regarding Electronic Arts' ability to meet the consensus estimates of of $1.272 billion.
However, the analyst writes, “We have compared the company’s game lineup in this year’s Q3 to last year’s lineup, have factored in year-over-year differences, and have concluded that Electronic Arts is not only highly likely to meet consensus estimates, but is highly likely to exceed such estimates.”
EA's guidance for the period forecasts revenues between $1.2-$1.3 billion, while Wedbush now anticipates third quarter results at or above $1.3 billion, with revenue being driven by the aforementioned quarterly game sales and contribution from the acquisition of Jamdat Mobile late in 2005, as well as foreign currency translation gains and management of the company’s financial reserves.
The analyst adds that EA's retails sales in the U.S were $244 million for October and November, a value that represented a 7 percent drop from the $263 million reported in the same period a year also. However, last year's figure did not include contributions from Jamdat, which the firm estimates to be worth $40 million for the quarter, and did not reflect positive contribution from foreign currency translation, estimated to be $35 million for the quarter.
“We believe that when December NPD data is reported next week, the company’s sales figures will be no more than 5% below last year’s $390 million figure ($344 million from console/handheld game sales and $46 million from PC game sales),” wrote Pachter. “Should EA’s December combined NPD figures come in above $370 million, we believe that the company will be well positioned to deliver revenues at or above consensus estimates.”
Pachter concludes: “We have been wrong before, but do not think that we are this time. We believe that even if EA’s December NPD results are $30 – 50 million below its results last year, the company can deliver revenues and earnings solidly within its guidance range by merely maintaining its reserves at historical levels. We would be surprised if EA were to report revenues below the consensus estimate while maintaining a record-high reserve, and do not expect the company to do so.”
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